<Last updated 13.04.2020>
Hi! If you are interested in Economics, I’ve prepared the below to help you learn about Economic Systems. You should take a look at this short article where I which I discuss about the economic systems and relationships between the main Economic Agents: Households, Businesses, Government.
We have already explain in previous videos how scarcity of goods and services is the main fundamental economic problem. Human beings counter this problem by interacting with each other. Each individual is part of a group of people who collectively offer their services and thus have their role in production and provision of goods and services.
In order to achieve provision of goods and services to the people, so it can be possible to satisfy their needs, each society needs a framework of rules and regulations, laws, principles and traditions governing how decisions will be taken regarding production, distribution and consumption: An economic system. This is a system that governs the economic relationships between the economic agents (Households, Businesses, Government) in an economy.
> The system of Traditional Economy is a system in which traditions, customs, and beliefs are the factors that determine the type of goods and the services the economy produces, as well how they will be distributed.
> Capitalism is an economic system born in the 18th century that involves a free market where the the laws and forces of supply and demand are free from any intervention by an authority. It is based on private ownership, independent decision making and pursuit to serve their own interest, to make profit. Importantly, decisions to be made for the production and distribution of goods and services are solely taken by individuals and businesses.
The Scottish Economist and father of liberal Economics said: “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest”. This “invisible” hand, the market force that drives demand and supply of goods in such a way that makes possible for us to satisfy needs. Int his system the government does not play any essential role in the production process but rather determines the framework in which the economy operates.
> The system of Command or Planned Economy is the one in which the government makes big decisions. Government central planners determine what to produce, the amounts and at what cost to the consumer. It is solely based on government decision. The government organizes, controls and directs the economy as a whole.
Even though it promotes equality, it was proved that it is not so efficient because it provides minimal incentives to the employed and limits personal freedom. Disadvantages also include unfair distribution of national income, lack of competition and there are no incentives for improvement.
> Another more familiar to us, is the Mixed Economy system, in which there is some government intervention. A mixed economy blends elements of market economies with elements of planned economies. So a mixed economy is based on:
– the private sector, where decisions derive from the pricing system (Demand and Supply)
– the government sector, where the government intervenes to correct market failures and to ensure that resources are distributed according to the national interest and general welfare.
The smooth operation of the mixed economy system is based on a good collaboration between these two sectors.
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